Monday, February 9, 2015

Currency War Budding?

The quantitative easing being pursued by the European Central Bank has the side effect of depreciating the Euro. This is advantageous to European exporters, and but a problem for everyone else’s exporters. That’s a problem because, taken as a whole, the EU is the largest economy in the world (although the EMU is somewhat smaller).

Anyway, what do you do if you’re a policymaker in a country that has to compete with Europe for trade? One option is to depreciate your own currency too.

This sort of race to the bottom is called a currency war. And the evidence is building that we’re in a small one. Check out this chart:

You already know that the Euro has been depreciating against the dollar. This shows that the Canadians and Australians are more concerned about the Europeans stealing their exports, so they’re matching the Euro depreciation.

Read about it in “Central Banks Move to Drive Down Currencies, Yielding Domino Effect” in the February 9 issue of The Wall Street Journal.